American International Group Inc's board approved the latest overhaul of a U.S. government rescue on Sunday that includes $30 billion in new equity and other measures aimed at bolstering the struggling insurer, according to a source familiar with the matter.

The agreement includes more lenient terms on an existing government investment in AIG preferred shares and a lower interest rate on a $60 billion government credit line, the source said.

The equity commitment would give AIG the ability to issue preferred stock to the government later, the source said.

Under the deal, the London Interbank Offered Rate (Libor) floor on the interest rate AIG pays on the government's credit line would be removed, saving the insurer about $1 billion a year, the source said.

AIG now pays 3 percentage points above three-month Libor.

AIG will also give the U.S. Federal Reserve ownership stakes in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said.

The debt-to-equity swap would help AIG repay much of the roughly $40 billion it has drawn from its government credit line, The Wall Street Journal reported on Sunday.

AIG had been trying to sell Alico and a part of AIA in a bid to raise money to pay back the government.

The government has also agreed to finance potential buyers of International Lease Finance Corp, the aircraft lessor that AIG has been trying to sell, the source said.

AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.

The company may securitize $5 billion to $10 billion under that plan, according to the Journal.

An AIG spokeswoman could not immediately be reached for comment.

(Editing by Ted Kerr)

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